Microfinance in Nigeria two years after CBN’s intervention
By Graham Orodje
Prior to CBN’s intervention, Microfinance in Nigeria was taking a swift decline into the abyss. The sector was riddled with fraud and mismanagement of funds. Some of the mismanagement may have been down to a lack of understanding of Microfinance by the senior managers in some of the Microfinance Banks. This assumption was corroborated by MFB’s renting lavish offices, providing their senior personnel with salaries and benefits similar to those offered by larger commercial banks. CBN’s intervention was late in coming, but was nonetheless welcomed.
CBN set about evaluating the entire sector and took action to address some of the issues that had plagued it. This included withdrawal of the licenses of some of the MFB it believed were not fit for purpose. CBN also disposed of the one size fits all license and created three licenses; Local, State and National. Each one required different starting capital and on-going minimum capital. Many MFBs recapitalised to meet the new requirement. CBN’s actions to sanitise the sector was complemented by NDIC’s (Nigerian Deposit Insurance Corporation), who commenced a repayment program for depositors of MFBs that had closed as a result of mismanagement or had their licenses withdrawn.
The actions have brought some stability to the sector, although there is still some way to go before the sector can start to fulfil its social remit of financial inclusion and poverty alleviation.
A few problems still continue to plague the sector. The key ones include rates of interest charged by MFBs, location of MFBs and financing.
There have been numerous articles suggesting the levels of interest rates charged by MFBs in Nigeria are too high. They range from 30% to over 60%. This level of interest will demotivate many but the desperate to seek loans from MFBs. The pressure of meeting the repayments with high interest rates can also be counterproductive. Any Microbusiness owners paying these levels of interest will not be able to grow their businesses and improve their lives. The damaging effect of high interest rates caused to Microfinance in India must be noted and not allowed to happen in Nigeria. The interest rates in India were much lower than the ones reportedly charged by MFBs in India, but were still too high and caused many to commit suicides. It is not advocated that interest rates should be regulated, but Microfinance Banks must be continually made aware of the need for responsible lending and the need to ensure interest rates are not excessive. Any reported excessive interest rates must be investigated by CBN and punitive action must be taken against any MFBs found guilty of excessive profiteering.
Many MFBs are located in urban areas. There needs to be an increase in the number of MFBS located in rural areas. Whilst there is a need for some Microfinance Banks to be located in urban areas, the requirement for rural based Microfinance Banks is much more critical for wider financial inclusion because it is unlikely that larger commercial banks will have any presence in rural communities. Commercial banks should also be encouraged to open accounts for Micro businesses and those of low income.
The stability in the sector has encouraged international Microfinance Investors to provide finance to some MFBs. This is likely to continue as the sector continues to grow and eradicates past errors.
The stability in the sector has encouraged more international Microfinance Investors to provide finance to some MFBs. This is likely to continue as the sector continues to grow and eradicates past errors.
The introduction of a Microfinance Development Fund has been mooted. As yet this has not materialised. When the fund is finally introduced, most of it should be targeted at those MFBs that are either based in rural areas or have a good concentration of their business in rural areas.